Loan modification can adjust the conditions of a person’s loan so as to make it more affordable for the borrower. These mortgage modifications can adjust one’s interest rate, duration of the loan or a combination of both so as to make the monthly payments more affordable.
If you are being considered by the bank for a loan modification, and if you file for bankruptcy, it is likely that your loan modification will be stopped from being considered and you will be bounded by the original loan terms of your mortgage. Bankruptcy filling regardless under which Chapter you file for bankruptcy, in theory , will not affect an approved loan modification. So, lenders will continue with your modified loan terms, even if you file for bankruptcy.
If bankruptcy has been filed under chapter 13, the loan modification cannot be finalized unless the bankruptcy court approves its terms, since the bankruptcy court has control over the bankrupt person’s future payments and his and her estate.
If you have filed for bankruptcy under chapter 7 of the bankruptcy code, once you’ve finalized your loan modification terms and confirmed that with the servicer of the loan or directly with the lender, you should be able to continue the modified loan payment plan even after the bankruptcy case. If it’s a mortgage loan you need modified, bankruptcy discharge will erase your loan but won’t be able to prevent the lender from taking your home away. To prevent this, a reaffirmation agreement will be in order. Some servicers need the reaffirmation in order to continue with the loan modification. The trustee governing your discharge has no involvement in your loan payments under chapter 7, unlike in chapter 13.
If the loan comes under the Home affordable modification program, the guidelines allow loan modification to a person with bankruptcy status, or one who’s filed for bankruptcy. If the debtor’s bankruptcy proceedings are ongoing, the modification terms of the loan have to be approved by the bankruptcy court before they can be made permanent. The effect of bankruptcy on the loan modification also depends on the servicer’s policy toward bankruptcy cases. Confirm with the servicer’s guidelines if your active bankruptcy case allows loan modification and or allows you to even be considered for a modification.
Loan modification also aims at minimum incurred losses on the lenders part. To decide whether the original or the modified terms of the loan better suit the lender, the net present value test is considered. Passing this test is a prime requirement of a loan modification. And bankruptcy can have a great effect on the outcome of this test. Your credit score is a factor used to calculate the NPV, and bankruptcy may affect it. On the other hand, bankruptcy means no defaults on the loan payment and wipes off borrowers unsecured obligation. This may be a positive for one’s modifications consideration, in that not having any credit card payments means more disposable funds to pay for the mortgage on a monthly basis.